Stablecoins weaken bank lending and monetary policy in Europe: ECB

The European Central Bank said rising stablecoin use can pull money out of bank deposits and weaken the way monetary policy flows through to lending, according to a new ECB working paper published Tuesday.

Growing adoption of stablecoins, which are digital assets often pegged to currencies such as the US dollar or euro, is expected to draw funds away from traditional bank deposits, the ECB said in its latest working paper series, “Stablecoins and Monetary Policy Transmission,” released Tuesday.

“Our analysis shows that rising interest in stablecoins is linked to a measurable decline in retail bank deposits and a reduction in lending to firms,” the report said, noting that stablecoins can reduce the amount of credit banks provide to the real economy.

The ECB noted that the effects are nonlinear and vary depending on the scale of stablecoin adoption, their design features, and how they are regulated.

The report is part of the ECB’s ongoing efforts to monitor stablecoins, whose market capitalization has more than doubled over the past three years to $312 billion and is projected to reach $2 trillion by 2028.

Stablecoin impact: Banks, monetary policy and why currency matters

In assessing the impact of growing stablecoin adoption on banks, the ECB highlighted a deposit-substitution effect, where households and firms move funds from retail bank deposits to digital assets.

“Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses,” the study said.

“When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable,” it added.

Actual and expected stablecoin market development. Source: ECB (Citigroup, Coinbase, JPMorgan)

The report also finds that stablecoins can change how policy interest rates affect bank funding costs and lending, with impacts varying by adoption scale, design and regulation.

“We find that stablecoin adoption interferes with multiple monetary policy transmission channels, potentially weakening the predictability of policy actions,” the ECB said.

The central bank warned that foreign-currency stablecoins could further weaken the connection between domestic monetary policy and bank lending, with risks amplified when the market is dominated by non-euro-denominated tokens.

The study reiterated that US dollar-backed stablecoins make up the vast majority of the stablecoin market. Data from CoinGecko shows these dollar-pegged tokens are valued at $301 billion, representing 97% of total stablecoin market capitalization at publishing time.